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1 | |
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? |
| | A) | The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. |
| | B) | Management's disregard of its responsibility to maintain an adequate internal control environment. |
| | C) | The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions. |
| | D) | Management's refusal to permit the CPA to perform substantive tests before the year end. |
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2 | |
Which of the following matters generally is included in an auditor's engagement letter? |
| | A) | Management's responsibility for the entity's compliance with laws and regulations. |
| | B) | The factors to be considered in setting preliminary judgments about materiality. |
| | C) | Management's vicarious liability for illegal acts committed by its employees. |
| | D) | The auditor's responsibility to search for significant internal control deficiencies. |
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3 | |
Which of the following factors would be of least importance to an auditor in determining how much reliance can be placed on the work of internal auditors? |
| | A) | The competence and objectivity of the internal auditors. |
| | B) | The materiality or significance of the accounts examined by the internal auditors. |
| | C) | The audit risk associated with the accounts examined by the internal auditors. |
| | D) | The nature of the audit software documentation used by the internal auditors. |
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4 | |
The audit committee of a company which is responsible for the appointment of the independent audit firm should consist of: |
| | A) | Members of the board of directors who have a financial interest in the company. |
| | B) | Members of the board of directors who are not officers or employees. |
| | C) | Representatives of major equity interests- i.e. common and preferred shareholders. |
| | D) | Representatives from management, suppliers, and shareholders. |
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5 | |
When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor should document all of the following except: |
| | A) | How the expectation was developed. |
| | B) | All possible explanations of unexpected differences, whether plausible or not. |
| | C) | Ratios developed from recorded amounts. |
| | D) | Additional auditing procedures performed in response to significant unexpected fluctuations. |
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6 | |
Which of the following could cause inventory turnover to decline significantly from the prior year? |
| | A) | Sales at the end of the year are unexpectedly slow, leaving a large balance in ending inventory. |
| | B) | An excess amount of direct labor is allocated to cost of good sold. |
| | C) | Some inventory sold after the end of the current year is recorded as sales for the current year. |
| | D) | The company typically uses LIFO to account for inventory but mistakenly used FIFO during the current year. |
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7 | |
Which of the following would not necessarily be considered a related-party transaction? |
| | A) | Purchases from another corporation controlled by the client's majority stockholder. |
| | B) | Loan from the client corporation to a major stockholder. |
| | C) | Sales to the primary customer of your client's main competitor. |
| | D) | Sale of land to the client corporation by a board member. |
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8 | |
Which of the following series of steps represent the correct sequence of evidence as represented in the audit testing hierarchy? |
| | A) | risk assessment, tests of controls, tests of details, substantive analytical procedures. |
| | B) | risk assessment, tests of controls, substantive analytical procedures, tests of details. |
| | C) | tests of controls, risk assessment, tests of details, substantive analytical procedures. |
| | D) | tests of controls, risk assessment, substantive analytical procedures, tests of details. |
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9 | |
Substantive tests include all of the following except: |
| | A) | Tests of transactions. |
| | B) | Analytical procedures. |
| | C) | Walk-throughs. |
| | D) | Tests of balances. |
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10 | |
An auditor's analytical procedures indicated that their client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of A/R remained about the same. Which of the following client explanations would most likely satisfy the auditor? |
| | A) | The client relaxed its credit standards in the current year and sold more merchandise to customers with poor credit ratings. |
| | B) | Twice as many accounts receivable were written off in the prior year in comparison to the current year. |
| | C) | A greater percentage of A/R were currently listed in the "Over 90 days past due" category than in the prior year. |
| | D) | The client opened a second retail outlet store in the current year and its credit sales approximately equaled those of the older, more established store. |
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